Principles of Regulation - Staying True to the Cause

Most regulators were established via laws passed by the Parliament. Through such laws, their purposes, functions and enabling powers were defined. Let's take a pause here and reflect the essence of being established through an act of Parliament.

Parliament is where the representatives of the people meet to debate and enact laws. Once passed, these laws would be binding on all Malaysians. In theory, all laws must be created on the premise that they would bring greater good to our society. Not everyone would win, some might lose if their conducts are against public interests. For example, a person who committed an act of corruption, if convicted based on the provisions of the anti-corruption laws, could be sent to prison.

Hence, all regulators should not lose sight of the reasons why they were established, to bring benefits to the people and to prevent those who conduct themselves in ways which are detrimental to the interests of the society from causing further harm. Some regulators have another dimension to their purpose of establishment, to develop and grow certain economic sectors which in turn would provide opportunities to Malaysians to participate and enjoy the prosperity of this nation.

This is the reason in formulating new laws and regulations, the regulatory objectives must be determined clearly and should be within the regulatory mandates of regulators. As discussed in previous postings, once these objectives are set, they ways to get the outcomes should be as such that it does not be more burdensome than necessary. 

In practice, there could be challenges which regulators have to face in pursuing their regulatory mandates. 

As laws are passed by politicians, they are open to lobbying by interest groups which have their selfish interests to pursue. While this could be a fair game in a democratic process, we do not want situations where decisions are made not on fair regulatory principles where the centre is the people but based on who could shout the loudest. This will turn our regulatory processes to something which are practised in primary schools.

One other challenges is when regulators forgot their own raison d'être. As a regulator matures into an institution, sometimes institutional interests could also be the cause of conflict. While institutionalising regulatory authorities is important so that they could be pillars which our society could rely on, they should never be allowed to override public interests. I am sure we do not want the tail to whack the dog.

In staying the cause, regulators need to bring people with competencies and conscience who are technically competent in areas which they are responsible for and would never waive from protecting public interests notwithstanding pressures exerted upon them from within and without. Do we have such people nowadays?

To compliment the human component, regulators should also establish regulatory principles, processes and organisational structures which would preserve their regulatory mandates. These processes and checks and balances would allow them to deal with pressures and lobbies. This does not mean that they are closing their ears from the views of their stakeholders but would provide counterbalance for any unfair pressures, especially from politicians who may not place public interests as the basis of their views.

Transparency would also help regulators to do their work. If the society is aware of what are the intention of regulators, opposing views and the principles on which decisions would be made, it would be rather challenging for those who are not bothered about public interests to pursue their agenda. The public has their role to play is they want Malaysia to be a country which provides fair opportunities to those who want to work hard. They cannot just be demanding fair treatment but do not want to be involved in issues which are handled by regulators.

This article concludes a series of postings on regulatory principles, issues and challenges which are faced by regulators. I trust the views shared here would provide some insights on regulatory business and why we, the Joe public, should be concern with how our regulatory agencies are playing their roles in making Malaysia a great country for every citizen to benefit from its prosperity. 

Principles of Regulation - A Juggling Act

A regulator would have to juggle between a number of stakeholders in formulating regulations which, on the overall basis, should serve the interests of the public which not stifling business. While the concept is straight forward enough, the implementation could be challenging for few reasons.

First challenge would be for regulators to understand how the market operates. As regulation is required due to market failures, where market forces are not able to set equilibrium levels which are fair to suppliers and consumers, regulators must have a good understanding of market mechanisms, building blocks and key issues. Any regulation which is designed without due consideration on these factors would carry the risk of being inefficient.

Coincidently, there was a conversation this morning of whether the Price Control and Anti-Profiteering Regulation which introduced recently would benefit the public at large or would have the unintended consequences of raising cost of doing business in Malaysia. The conversation could be downloaded here.

Second is about having clear objectives of the regulatory outcomes which are supposed to address the identified market failure. Without the clear objectives, regulators would lose the sense of direction and could end up creating solutions looking for problems. This is particularly true for regulations which are adopted from other jurisdictions to align our legal frameworks and business practices with certain international standards. 

If regulators do not understand the contexts surrounding the failures which are intended to be addressed by the adopted regulation, its application in markets where the surrounding practices are different or the pattern of outcomes are not the same would carry the risks of introducing regulations which are not effective but creating unnecessary burdens to business entities.

Third is about ensuring the measures introduced are no more burdensome than necessary. This is to ensure regulators try to find ways which are simple and easy for businesses to comply with the regulation, not requiring high compliance cost and able to mitigate the identified market failures.

Sometimes, due to pressure from various lobby groups or sue to political interests, regulations are stretch to go beyond just addressing market failures. For example, under the pretext of ensuring consistent quality, certification of a process could only be done by one business entity. An example of this is the motor vehicle inspection services in Malaysia. Instead to defining the technical requirements which could be achieved by certified workshops, the concession to inspect commercial vehicles is given to one company only. So, in addition to ensuring quality of inspection, a monopoly is also created by the regulation.

As mentioned above, regulators would have to balance between conflicting interests of various stakeholders in addition to lobby groups which want to benefit economically or politically from the regulation being considered. This requires regulators to have high level of integrity, independence and professionalism to ensure they do not go beyond what is necessary where on group of stakeholders lose more then others because of factors which are not related to market failures. Would this be possible?

There is one kind of regulators which are exposed to inherent conflicts of being regulators and having self-interests at the same time, professional bodies. While  naturally they are supposed to regulate their members to ensure public benefits are not compromised, the fact that some of the professionals who set standards are themselves practitioners could be scary. This is the reason why the self-regulatory model is challenged and for some services such as audit of public interest entities, an independent regulatory body is set up to ensure the conflict is managed.

As a conclusion, a good regulation is the one which market failures are addressed in ways which is no more burdensome than necessary. In achieving this objective, regulators must be professional and independent and have deep understanding of the market which it regulates. They must also be able to withstand pressures from lobbyists and politicians who want to stretch regulations beyond their original intended purposes.